GBP On Its Backfoot; Risk Trends Seen As Undermining It Further


Last week, GBP/USD weakened as the dollar began reasserting itself and risk trends wobbled. Cable (GBP/USD) fell to its worst levels in a month, with risk skewed towards further losses in the near-term. Broadly speaking there is still a lot of uncertainty about the longer-term trend. Markit PMI flash figures for services and manufacturing beat expectations by a fairly sizeable margin but that was about all the positive news there was to keep sterling bid. This morning, final UK GDP growth figures showed a YoY contraction of -1.7% while QoQ -2.2%, both slightly worse than expected. As second wave coronavirus fears and a longer road to economic recovery weigh on markets, sterling will likely remain vulnerable. GBP/EUR is trading at its worst levels since late March and a further probing of the panic days of then could be in the works. Longer-term 1.21 and 1.05 remain the major levels that need to be broken before a sustainable trend can emerge.


The dollar started off weak last week, but then swung higher for yet another intra-week reversal to the upside. Watch for signs of momentum picking up against both emerging market and developed market currencies. The coronavirus situation in the states is beginning to look dire again as many states are seeing surges in cases and hospitalisations just as lockdown restrictions are easing. A few states are already hitting the pause button on their reopening plans to help stem the surge. It is beginning to look increasingly likely that Trump may very well end up a one-term president in the wake of his handling of the coronavirus and racially driven social unrest. However, it is too early to count him out just as it was in 2016 when he trailed by a very large amount with only months to go before the election. The FOMC minutes are due out on Wednesday, but unlikely to be market moving. Fed Chair Powell has made it clear that he would like to see more done on the fiscal side to go along with the backing the central bank has been providing. U.S. markets will be closed Friday in observance of Independence Day.


As we noted the last couple of weeks, the rally from May into this month was at risk of failing again as it has time and again since the 2018 top in EUR/USD. Look for the euro to further validate this sequence in the days and weeks ahead. German unemployment figures are due out on Wednesday, with a forecasted 120k job lost in June with the unemployment rate ticking higher to 6.6% from 6.3%. On Thursday the euro-area unemployment rate is expected to rise to 7.7% from 7.3% the month prior.


The Canadian dollar hit its worst levels versus the US dollar since the beginning of the month, a trend we believe could continue. The threat of lower oil for a very extended period is seen as being a major headwind for the Canadian economy that relies materially on its energy exports. It seems reasonable to conclude that at some point in the second half of 2020 that we see USD/CAD trading 1.46+. Wednesday is the public holiday, Canada Day. The data docket is relatively light for the rest of the week.


AUD/USD is experiencing only mild weakness at this time, and generally chopping its way sideways since being unable to re-capture the 0.70 barrier. Risk trends will continue to be a significant factor here. If global stock markets find themselves in risk-off mode then look for the recent sideways chop to turn into declining prices for Aussie. On Thursday, retail sales are expected to have bounced back sharply in May by 16.3% compared to the historical plunge seen the month prior of -17.7%.